The Problem
A long-time IPA client was embarking on a program of projects that involved a new business venture and ran into a problem. The cost estimate at the end of Select (FEL 2) was nearly double the earlier estimate and about 40 percent higher than industry average, putting the project’s viability in doubt, even for a strategic project like this one. Although the initial cost estimate analysis identified the high-level areas that were higher than average (i.e., bulk materials), it was unclear what was driving these high costs and—more importantly—whether and where the cost could be reduced without cutting critical scope.
What IPA Did
After conducting a cost reduction exercise of its own, the client turned to IPA to find out why the cost estimate was still high and what could be done to make it more competitive. To address this problem, IPA did a deep dive into the cost estimate, working closely with the team members over a series of meetings to zero in on what was driving the higher than average cost.
IPA started with the company’s own closer look at the cost estimate and subsequent cost cutting efforts. After the company’s evaluation, the team cut scope to bring the cost down. IPA looked at how modifications to scope items affected the project’s overall cost effectiveness. We found that the client’s own efforts did reduce costs somewhat, but they were still very high.
Working closely with the client, we were able to find other sources of high costs and get the estimate closer to industry average. Some scope was counted twice and included in both the contractor’s estimated costs and the owner’s. In other places, the cost estimates were conservative because they were based on assumptions or incorrect scope information. The tank costs also included tank farm costs, so the individual tank costs looked very expensive. As another example, some assumptions were made for this project based on other projects in the program, even though the other projects were planned for different sites and in different countries. The characteristics of the specific project site and, in some cases, location factors need to be taken into account to develop an accurate cost estimate.
As part of the more detailed cost analysis, we used Cost Engineering Committee data to look at specific cost sub-categories. For example, if bulk materials costs are high overall, we can look at different categories of bulk materials, such as steel and concrete, to zero in on the exact source of the high costs. Comparing a project’s cost ratios with the respective industry average and normal range helps us to find project costs that are out of synch with typical industry experience and modify them, if necessary, to bring the cost estimate in line with historical expectations. For this project, the concrete costs were double the average for a similar project. Having this information allowed the team to challenge the contractor’s estimated costs.
How It Turned Out
The project team members found this approach to be very helpful because it allowed them to understand how IPA evaluates costs and what effect various scope items have on the overall project cost. The deeper understanding gained from the detailed look at the cost estimate also gave team members the knowledge to ask contractors the right questions and better evaluate their quotes.
Going forward, the company plans to use this IPA service for its larger projects and for projects that are first of a kind for the company. Any company that needs support for its estimating services or that is venturing into a new business area, especially those areas with already low margins like new energy projects, can benefit from the support provided by a detailed and interactive cost estimate review.